WATER COMPANIES Christopher Bamman 212-218-3989 cbamman@morganjoseph.com Richard S. Paget, CFA 212-218-3894 rpaget@morganjoseph.com Company Update / Estimates Change February 25, 2008 Key Metrics CCC - NYSE $18.45 Pricing Date 02/22/2008 Price Target NA 52-Week Range $18.95-$5.97 Shares Outstanding (mm) 40.5 Market Capitalization ($mm) $747.2 3-Mo Average Daily Volume 582,226 Institutional Ownership 98% Debt/Total Capital 31.0% ROE 9.4% Book Value/Share $3.37 Price/Book 5.5x LTM EBITDA Margin 12.50% EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar 0.05 -- 0.10E -- -- 2Q-Jun 0.09 -- 0.12E -- -- 3Q-Sep 0.07 -- 0.10E -- -- 4Q-Dec 0.08 -- 0.09E -- -- FY 0.31 0.39E 0.42E -- 0.52E P/E 59.5x 43.9x 35.5x Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar 83.0 -- 94.0E -- -- 2Q-Jun 88.4 -- 100.7E -- -- 3Q-Sep 84.9 -- 94.5E -- -- 4Q-Dec 94.8 -- 103.9E -- -- FY 351.1 385.6E 393.1E -- 442.8E 1 Year Price History for CCC Q1 Q2 Q3 2008 Created by BlueMatrix Company Description: Calgon Carbon Corporation (www.calgoncorp.com), headquartered in Pittsburgh, PA, is a global leader in services and solutions for making air and water cleaner and safer. The company has three operating segments: Carbon and Service, Equipment, and Consumer. The Carbon and Service segment manufactures granular activated carbon for use in applications to remove organic compounds from water, air and other liquids and gases, as well as reactivation of spent carbon and the leasing, monitoring and maintenance of mobile carbon absorption equipment. The Equipment segment provides solutions to customers' air and water purification problems. The Consumer segment primarily consists of the manufacture and sale of carbon cloth, lump charcoal, and briquettes. 21 18 15 12 9 6 3 Calgon Carbon Corporation Rating: Hold Top-Line Growth Drives 4Q07 Results; Hold Investment Highlights: Calgon Carbon reported 4Q07 (December) EPS that exceeded expectations. Improved pricing in its Activated Carbon and Services (AC&S) segment and lower legal expenses continue to drive Y/Y improvement in EPS. Along with the improved pricing, strength in select end markets continues to improve. The results demonstrate Calgon's ability to implement more rational pricing in its Activated Carbon and Services (AC&S) segment due to recently implemented tariffs and an SG&A benefit from lower legal expenses. We have raised our 2008 EPS estimates slightly and we maintain our Hold rating given the current valuation. A recent Federal Court ruling declared the Clean Air Mercury Rule invalid, which is expected to create short-term volatility and uncertainty in the market for powder activated carbon. Estimated demand for powder activated carbon has been reduced; however, prices are expected to rise longer term as demand is expected to outstrip supply. Reported EPS was $0.08 vs. ($0.19) a year ago, above our $0.05 estimate and Street consensus of $0.06. A combination of higher revenues and a lower effective tax rate than we had predicted (34% vs. our 38% est.) drove the improvement in EPS. Total revenue increased 19.5% to $94.8mm from $79.4mm a year ago, ahead of our $84.9mm expectation. Improved pricing and higher volumes for AC&S, particularly in the industrial process market, drove revenue in the AC&S segment up 23.3% to $79.9mm (vs. our $69.6mm estimate). Equipment sales declined 7.2% to $10.4mm (below our $11.8mm estimate) as demand for carbon absorption equipment has been weak in North America. However, demand did pick up for UV systems. Increased demand for activated carbon cloth products drove Consumer sales up 30.4%. The favorable pricing benefited margins; the operating margin improved to 6.9% (vs. our 6.0% estimate) compared to (10.1%) a year ago. The more rational pricing drove the improved profitability measures. SG&A leverage improved to 18.4% from 19.4% last year. However, raw materials pricing pressure did weigh on the gross margin. Management guidance was limited to trends and nothing specific to revenue or EPS growth..we have raised our 2008 EPS estimate to $0.42 from $0.39, previously, and are introducing a 2009 EPS estimate of $0.52. Valuation: CCC stock is trading at 18.9x our 2008 EV/EBITDA estimate. Given the relatively high valuation multiple, we believe much of the improving operating fundamentals is already priced into the stock. Thus, we maintain our Hold rating on the shares at this time. The Disclosure section may be found on pages 5-6 of this report.
Quarterly Trends 4Q07 Key Points: On February 8, 2008, the Federal Court ruled that the Clean Air Mercury Rule (CAMR) was declared invalid on the basis that the Environmental Protection Agency (EPA) did not follow certain procedures. The ruling states that the EPA violated the Clean Air Act by excluding oil and coal fired power plants from the more stringent air pollution controls. The EPA must now develop more stringent standards to control mercury and other toxic pollutants from power plants. The EPA is required to make a statement within 45 days. There are 18 states, including Illinois and Texas, that have more stringent mercury removal standards than those outlined by the CAMR. Potential customers in those states with more stringent standards than the CAMR continue to move forward with their plans with regard to timing and regulation. Those states that had intentions of following the CAMR regulations are likely taking a wait and see stance. Furthermore, states that have not adopted any regulation regarding the mercury removal remain unpredictable regarding their potential demand for activated carbon. There is one utility in Texas that has been issued a consent decree to address the removal of mercury. Demand for activated carbon is expected to outpace supply, which should help prices. China continues to internally consume more coal/carbon. Carbon dedicated to purification of drinking water is estimated at 385mm pounds. Additionally, disinfection by-products in the US market are also expected to eat into supplies of activated carbon. Importantly, utilities are concerned about a potential supply shortage of activated carbon when it's time to address their mercury removal needs. Despite the supply concerns of the utilities, the company expects to meet the carbon demands of its customers. Revenues experienced double-digit growth in the Americas (+12%), Europe (+16%), and Asia (+44%). Furthermore, a few municipal projects were delayed and revenue was shifted to 4Q07 from 3Q07. The gross margin was adversely impacted by increased costs related to raw materials, energy, and transportation. Price increases implemented in October 2007 lagged cost increases, but should help recapture some of the eroded margin in 1Q08. Other items affecting the gross margin include accrued costs to exiting select satellite warehouses (expected to generate cost saving of $400K to $500K annually) and shifting slow-moving inventory to more in-demand products to be opportunistic. The company is expected to book a $9.25mm pre-tax gain from a legal settlement to be booked in 1Q08 related to its case against AST. Income Statement ($ in thousands) Revenues $79,353 $83,030 $88,428 $84,861 $94,805 Gross Profit 20,062 24,606 28,872 27,219 28,154 Gross Margin 25.3% 29.6% 32.7% 32.1% 29.7% SG&A as a % of Revenue 19.4% 18.6% 17.0% 18.0% 18.4% Operating Income (7,990) 4,911 8,625 6,520 6,500 Operating Margin -10.1% 5.9% 9.8% 7.7% 6.9% EPS ($0.19) $0.05 $0.09 $0.07 $0.08 2 MORGAN JOSEPH & CO. INC.
Carbon and Service ($ in thousands) Sales $64,790 $68,683 $74,723 $72,322 $79,880 Sales Growth 6.6% 5.4% 10.8% 6.6% 23.3% EBITDA 3,817 8,473 13,015 10,705 10,383 EBITDA Margin 5.9% 12.3% 17.4% 14.8% 13.0% Equipment ($ in thousands) Sales 11,257 10,966 10,658 9,255 10,449 Sales Growth 49.4% 29.9% 12.8% 5.9% -7.2% EBITDA (541) (129) (607) (215) (132) EBITDA Margin -4.8% -1.2% -5.7% -2.3% -1.3% Consumer ($ in thousands) Sales 3,306 3,381 3,047 3,284 4,476 Sales Growth 11.8% 14.5% -16.0% 6.9% 35.4% EBITDA 296 828 548 457 478 EBITDA Margin 9.0% 24.5% 18.0% 13.9% 10.7% 3 MORGAN JOSEPH & CO. INC.
Calgon Carbon Corporation Income Statement FY04-FY09E ($ in thousands) 2004 2005 2006A 1Q07A 2Q07A 3Q07A 4Q07A 2007A 1Q08E 2Q08E 3Q08E 4Q08E 2008E 2009E Revenues $295,877 $290,835 $316,122 $83,030 $88,428 $84,861 $94,805 $351,124 94,000 100,687 94,516 103,868 $393,070 $442,812 Cost of Revenues 207,523 215,330 235,561 58,424 59,556 57,642 66,651 242,273 64,202 68,467 64,460 72,396 269,524 304,181 Gross Profit 88,354 75,505 80,561 24,606 28,872 27,219 28,154 108,851 29,798 32,220 30,056 31,472 123,546 138,631 Selling, General & Administrative 54,543 61,958 62,868 14,606 15,009 15,306 17,425 62,346 15,980 16,613 16,209 18,177 66,980 73,100 Research & Development 3,801 3,095 4,495 828 907 966-2,701 1,034 1,108 1,040 1,143 4,324 4,871 Depreciation and Amortization 22,004 21,042 18,933 4,261 4,331 4,427 4,229 17,248 4,229 4,229 4,229 4,229 16,916 16,916 Restructuring and Other Charges - 2,570 6,940 - - - - - - - - - - - Operating Income 8,006 (13,160) (12,675) $4,911 $8,625 $6,520 $6,500 26,556 8,555 10,270 8,578 7,924 35,326 43,744 EBITDA 30,010 10,452 13,198 9,172 12,956 10,947 10,729 43,804 12,784 14,499 12,807 12,153 52,242 60,660 Interest Income 697 393 - - - - - - - - - - - - Net Interest Expense (3,409) (4,565) (5,155) (1,148) (1,010) (908) (747) (3,813) (750) (750) (750) (750) (3,000) (3,000) Other Income (3,238) (2,138) (2,210) (403) (408) (482) (148) (1,441) (200) (200) (200) (200) (800) (800) Income Before Income Taxes 2,056 (19,470) (20,040) 3,360 7,207 5,130 5,605 21,302 7,605 9,320 7,628 6,974 31,526 39,944 Income Taxes (846) (9,688) (3,946) 2,380 3,147 1,949 1,903 7,826 3,042 3,728 3,051 2,789 12,611 15,977 Net Income before MI & EIE 2,902 (9,782) (16,094) 980 4,060 3,181 3,702 13,476 4,563 5,592 4,577 4,184 18,916 23,966 Equity Income 1,000 (725) 278 1,054 402 310 211 1,977 600 600 600 600 2,400 2,400 Minority Interests 66-8 - - - - - - - - - - - Net Income before EIE 3,968 (10,507) (15,808) 2,034 4,462 3,491 3,913 15,453 5,163 6,192 5,177 4,784 21,316 26,366 Income from Discontinued Operations 1,920 3,091 1,214 - - - (70) (166) - - - - - - Extraordinary Item, net - - 8,332 - - 1,553-1,553 6,105 - - - 6,105 - Reported Net Income 5,888 (7,416) (7,476) 2,034 4,462 5,044 3,913 17,006 11,268 6,192 5,177 4,784 27,421 26,366 Reported EPS from Continuing Ops $0.10 ($0.27) ($0.40) $0.05 $0.09 $0.07 $0.08 $0.31 $0.10 $0.12 $0.10 $0.09 $0.42 $0.52 Reported EPS $0.15 ($0.19) ($0.19) $0.05 $0.09 $0.10 $0.08 $0.34 $0.22 $0.12 $0.10 $0.09 $0.54 $0.52 Diluted Shares Outstanding 39,456 39,615 39,927 42,661 47,745 50,358 51,102 50,557 51,150 51,150 51,150 51,150 51,150 51,150 Margins Gross Margin 29.9% 26.0% 25.5% 29.6% 32.7% 32.1% 29.7% 31.0% 31.7% 32.0% 31.8% 30.3% 31.4% 31.3% SG&A as % Sales 18.4% 21.3% 19.9% 17.6% 17.0% 18.0% 18.4% 17.8% 17.0% 16.5% 17.2% 17.5% 17.0% 16.5% R&D as % Sales 1.3% 1.1% 1.4% 1.0% 1.0% 1.1% 0.0% 0.8% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% D&A as % Sales 7.4% 7.2% 6.0% 5.1% 4.9% 5.2% 4.5% 4.9% 4.5% 4.2% 4.5% 4.1% 4.3% 3.8% Operating Margin 2.7% -4.5% -4.0% 5.9% 9.8% 7.7% 6.9% 7.6% 9.1% 10.2% 9.1% 7.6% 9.0% 9.9% Pre-Tax Margin 0.7% -6.7% -6.3% 4.0% 8.2% 6.0% 5.9% 6.1% 8.1% 9.3% 8.1% 6.7% 8.0% 9.0% Tax Rate -41.1% 49.8% 19.7% 70.8% 43.7% 38.0% 34.0% 36.7% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Net Margin 2.0% -2.5% -2.4% 2.4% 5.0% 5.9% 4.1% 4.8% 12.0% 6.1% 5.5% 4.6% 7.0% 6.0% Growth Revenues 6.3% -1.7% 8.7% 8.4% 9.8% 6.5% 19.5% 11.1% 13.2% 13.9% 11.4% 9.6% 11.9% 12.7% Operating Income 5.4% -264.4% -3.7% -509.6% -564.5% -500.2% -181.4% -309.5% 74.2% 19.1% 31.6% 21.9% 33.0% 23.8% Net Income -8.1% -437.1% 64.5% -130.8% -248.4% -230.9% -147.8% -183.7% 365.6% 37.7% 43.9% 13.0% 40.4% 26.7% EPS 0.0% -363.7% 49.3% -163.7% -235.8% -215.2% -140.0% -177.2% 111.7% 29.5% 46.0% 22.1% 36.3% 23.7% Source: Company reports and Morgan Joseph & Co. Inc. estimates 4 MORGAN JOSEPH & CO. INC.
Required Disclosures Rating and Price Target History for: Calgon Carbon Corporation (CCC) as of 02-22-2008 20 16 12 8 4 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2006 2007 2008 0 Created by BlueMatrix I, Christopher Bamman, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. I, Richard Paget, CFA, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] 62.39 35.29 HOLD [H] 37.61 9.76 SELL [S] 0.00 0.00 Meaning of Ratings A) Buy means reasonable outperformance relative to the market over 12-18 months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are 5 MORGAN JOSEPH & CO. INC.
our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY 10020 Tel. 212.218.3700 Fax. 212.218.3789 Sales and Trading New York Tel. 212.218.3767 Fax. 212.218.3705 Pittsford Tel. 877.237.6542 Fax. 585.899.6029 6 MORGAN JOSEPH & CO. INC.